Private Social Compliance Initiative: What’s in the Name?

For more than two decades, private social compliance initiatives have been a significant part of global business. In the current years, the implementation of social compliance system is very much embedded in the soucing practices of labor-intensive consumer goods companies such as apparel and footwear. As such, it has become the norm of the industries.

The concept of social compliance stemmed from the Corporate Social Responsibility idea that has evolved since the Industrial Revolution in the 19th century, which amongst others, highlighting poor working conditions and unfair treatment at the workplace. At the earlier stage of CSR development, the State had not yet regulated or established a comprehensive and detailed regulatory strategy on labor and working conditions. Thus, in the earlier era, corporations and industries were likely the primary directors, if not at the very least the primary player, of labor and social progress.

With the continuous expansion of the State’s interference on labor compliance, cross-cutting between statutory and private approaches on the subject matter is inevitable. Due to global corporations’ financial power and economic influence throughout the supply chain, their initiatives’ efficacy is perceived higher than State policy. Nevertheless, State statutory instruments encompass the principle of rule of law, as well as justice and fairness. As such, in -depth discussions and perhaps research are still needed to determine whether or not private social compliance initiatives compete or complement the existing State labor policy.

A. Development of Corporate Social Responsibility Concept

The origin of the concept of Corporate Social Responsibility (CSR) can be traced back to the industrial revolution in the late 19th century, the time when the proliferation of business and manufacturing was conspicuous. The emergence of various business sectors raises concerns and criticisms about working conditions, especially of women workers and children. At that time, reformers in Britain and America perceived processing processes or manufacturing as the primary source of various social problems, including labor unrest, poverty, child labor, as well as unfair treatment of women in the workplace. Business and industry at that time were not familiar with social concepts. In the industrial revolution, even today, employers sometimes find it difficult to determine what is the reason and objective of establishing business, that is, to make workers more productive or of social reasoning such as to meet the needs of workers, make their lives better and increase the number of individuals who can contribute in society (Carroll, 2008).

According to Daniel A. Wren, CSR during the industrial revolution was an unbalanced mixture of humanitarianism, philanthropy, and business intelligence (Carroll, 2008). Wren also argues that since philanthropic concepts were known earlier than the CSR concept, it is hard to tell whether the philanthropic activities committed by famous entrepreneurs of the time were personal philanthropy or business philanthropy. Nevertheless, entrepreneurs’ financial or charitable contributions with social objectives such as giving charity to an orphanage can essentially be considered as socially responsible activities.

Since the industrial revolution up to the 1950s, the concept of CSR varies according to organizational needs. It focuses more on actions and activities that benefit the company or shareholders with minimal consideration of the interests of (external and internal) stakeholders. In this period, the existing two concepts of CSR are known as profit-maximizing management. CSR action is a way that companies maximize profits by concentrating donations or financial aid on specific communities or charities that support the company’s business progress. The second concept, named trustee management, emerged in the 1920s to 1930s. In this concept, the company is responsible for maximizing shareholder wealth and creating and maintaining a fair balance for other stakeholders such as customers, workers, and the community.

The idea of business philanthropy from the industrial revolution period until the late 1940s spearheaded the development of modern CSR. According to H.R. Bowen in his book Social Responsibilities of the Businessman published in 1953, which later became the label of the CSR concept in the 1950s, CSR is the obligation of employers to pursue policies, to make decisions, or follow the desired line of action in the sense of as (end) goal and (obey) the values of society. The definition of this concept is also explained by K. Davis and William C. Frederick, who define CSR as a business contribution to the community (UN ESCAP, 2012). When carrying out its operations to achieve the economic objectives of corporate profits, a company has an obligation or responsibility to pay back to the community. In other words, within the economic goal, there are social goals that fulfilment becomes the company’s responsibility as part of the community. William C. Frederik summarized the development of CSR in the 1950s into three core ideas: corporate managers as a public trust through shareholding systems, balanced claims from stakeholders for corporate resources, and the acceptance of business philanthropy within CSR (UN ESCAP, 2012).

The development of CSR in the 1960s and 1970s is distinguished by the rapid growth of the labor advocacy movement, consumer protection, and environmental conservation. During this period, labor issues transitioned from special interest status to the object of formal government regulation (Carroll, 2008). The concept of CSR became more comprehensive by incorporating ideas on corporate responsibility, stakeholder interests, social issues in business conduct, and legal rules and ethical values. In 1979, Archie B. Carroll proposed a three-dimensional conceptual CSR model consisting of corporate responsibility, social business issues, and corporate action. Furthermore, corporate responsibility is manifested into four types of economics, law, ethics, and philanthropic, where the order of the four types of responsibility indicates the relative importance of each type (Carroll, 2008). Meanwhile, according to H. L. Johnson, instead of only striving for greater returns to shareholders, corporations are also responsible for calculating the interests of their employees, suppliers, dealers, local communities, and the nation as a whole (UN ESCAP, 2012).

The development of CSR in the 1980s and 1990s adopted the previous concept related to the principles and practical processes in social performance, which is in line with industry demands and challenges faced by stakeholders. For example, S.L Wartick and P.L. Cochran adopted the three-dimensional concept of CSR proposed by Archie B. Carroll in 1979 with a focus point on the process by taking more action to address various social problems and simultaneously responding to changes in the community’s challenges (UN ESCAP, 2012). D.J. Wood then continued the three-dimensional concept of CSR in 1991 with an emphasis on the results or performance of CSR initiatives. Wood introduced the concept of four types of corporate responsibility: economics, law, ethics, and philanthropy related to the three institutional levels of legal, organizational and individual, while at the same time extended corporate actions for assessment, shareholder management, and implementation management (UN ESCAP, 2012). This CSR concept is known as the institutional framework and extended corporate activities.

CSR idea development in the 2000s was dominated not by a new idea but by the empirical research linking CSR to other relevant variables and implementing CSR initiatives (Carroll, 2008). In 2003, M. S. and A.B. Carroll introduced the concept of three domain approaches: economics, law, and ethics (UN ESCAP, 2012). This concept is a subtraction of Carroll’s earlier vision of introducing four domains of approaches: economics, law, ethics, and philanthropy. In this period, the definition of CSR is simplified, but the processes and implementation of CSR initiatives are expanded. The European Commission (2011) defines CSR as a process to integrate social, environmental, ethical, human rights, and consumer concerns in business operations and core strategies through close collaboration with stakeholders.

B. Private Social Compliance Initiatives

Economic globalization has led to the shift of supply chains to less developed countries where lower prices and cheap labor are abundant. In the past 30 years, the garment industry, for example, significantly expanded its production and distribution to less developed countries such as China, Bangladesh, and Turkey (Turker and Altuntas, 2014). This has its own risks associated with weak regulation and labor inspection in the supply countries, primarily of issues such as working conditions and human rights violations.

The Social Compliance Initiative of the global garment supply chain was fueled by the emergence of media campaigns and the demands of non-governmental organizations, trade unions, and customers towards unethical sourcing practices in the supply chains. External stakeholders argued that numerous successful global apparel and fashion corporations had exploited workers by hiding behind the absence of national regulations and weak State control over labor compliance. They also argued that multinational corporations are responsible for ensuring that workers who make their products are protected and that their fundamental rights are recognized even if they were other companies within a specific corporation’s supply chains.

In essence, private social compliance initiatives aim to encourage ethical sourcing, transparency, and compliance across the supply chain (Mayer and Pickles, 2010). Efforts outside these state institutions are voluntary to extend corporate responsibility to the global supply chain. Due to pressure from stakeholders significantly affecting the company’s image that impacts customer confidence and sales volume (O’Rourke, 2003), international garment companies establish an integrated corporate responsibility system in their global sourcing practice and cover all production chains. Opponents of the system argued that numerous initiatives were established only to protect the corporation’s image and alleviate the pressure of the external stakeholders. However, the proponents asserted that the system encourages compliance to the state regulation and fosters a socially responsible market on which sometimes state regulation falls short.

At the beginning of the formation of the social compliance system, international apparel companies based their design on the concept of three-dimensional model principles, policies, and processes that evolved as the idea developed. A private social compliance system generally consists of assessment standards, audits/assessments, and remediation. In general, the assessment standard or better known as Code of Conduct (CoC), is a summary of the International Labor Organization’s international core labor standards comprising values of child labor protection, recognition of workers’ right to freedom of association, anti-discrimination, anti-forced labor, working time and rest periods, compensation and safe and healthy working conditions (Esbenshade, 2004). Environmental protection is also one of the main concerns of some international garment buyers and is covered by their CoCs. The CoCs also include a norm of respecting the National Labour and Environment Regulations.

CoC becomes the primary reference in conducting audits or assessments. Assessment can be done by an external party that is an independent audit company or internally by the corporation employees (Welford and Frost, 2006). Assessors and auditors use the triangulation method when conducting their work. The method includes document and records checks, interviews with workers and management, and production floor observation. The data obtained during the assessment process are then construed and synchronized with the CoC and concerned National Regulations to determine the compliance level of a specific supplier within the supply chain. The auditees use assessment reports to determine remedial measures. In comparison, their buyers use the reports to weigh their current and future orders, as well as their production strategies at the assessed suppliers or sourcing country.

The management of garment suppliers generally undertakes corrective action actions under the supervision of international buyers’ representatives. In other words, the plan and implementation of remedial measures are solely the employer’s responsibility, without the involvement of their stakeholders. In this improvement stage, the buyer establishes the time standard of corrective action, provides essential information about acceptable corrective action, and monitors and periodically measures the improvement results. Nike, for example, has teams in countries where the production of goods is conducted that monitors compliance levels and improves working conditions (Carroll, et al., 2013). In a certain period, audit or assessment will be conducted again to measure compliance levels and the latest working conditions improvement at the suppliers.

C. Private Initiatives vs. State Labor Legislative Regime

The highly acclaimed impact of the business approach to working conditions improvement is a debatable topic. Some argue that private approaches ensure sufficient progress of regulatory compliance because the leading player is taking responsibility for its practices through a voluntary corporate social responsibility system. However, others argue that although positive results should be acknowledged, the liberal approach to regulated labor could not replace the State Regulatory measures because of the objective division. Also, as more and more drawbacks are noted in the private established system and its implementation over time, some argue that the impact on working conditions in the supply chains is insignificant.

Reliance on state legislation is undoubtedly superior compared to the voluntary Corporate Social Responsibility system because of interests and objective disparities. A private system’s objective is anchored by the corporation’s business interests and market perception of its products. The decision to adopt a voluntary private compliance system is likely influenced by economic interests such as brand image, mitigation of business risks, increased competitiveness, or merely share value. In contrast, State regulatory instruments are established to create order in the society based on the argument that all citizens are equal in the eye of law. For instance, the State Regulations ensure a level playing field for all by protecting disadvantaged groups in society. Another example is that State Law regulates corporation conduct, assuring that pervasive corporation practices do not outplay citizens’ fundamental human rights.

The criticism on private approaches to regulates labor does not end on the objective divergent only. It also comes in full force on the system mechanism itself. Critics argue that reports on the impact of private compliance initiatives are negligible because compliance monitors only capture isolated issues of poor labor practice instead of endemic and structural problems. As a result, it limits the ability of the supply chains to comprehend deeper processes necessary to create a sustainable improvement strategy to achieve significant impact (Locke, 2007; Posthuma, 2010). Further, the system agency overlooks direct and indirect contributing factors when quantifying the level of improvement in the supply chains. In terms of conducting a comparative study on the level of compliance amongst their suppliers, international brands often disregard country effects, factory characteristics, and business relations between them and each particular supplier (Locke et al., 2007).

The opponents of private labor compliance monitoring also argue that global corporations should improve their private compliance monitoring methods. The long-standing practices have created monitoring fatigue, leading suppliers to cheat the system instead of improving working conditions and enhancing their compliance motives. Suppliers are overwhelmed with constant monitoring; thus, they take shortcuts and falsify records to be perceived as complying with the codes to maintain the business. They have to adhere to several standards and host frequent monitoring depending on the number of customers. At the same time, numerous private labor initiatives and measures have different focal points and methods that lead to uncertainty in the improvement priority (Kok et al., 2001). Moreover, monitoring is costly – this cost could be funneled to finance genuine improvement instead of merely hosting visits and passing audits. Apparel suppliers in Asia reported that the less expensive cost of one-day monitoring is at least US$ 300 per person day, and they host more than 50 visits per annum (Welford and Forst, 2006).

Numerous studies conducted by the proponents of the private sector compliance initiatives show that the private sector approaches may significantly improve working conditions in the supply chains. However, the system has its drawbacks. The methods adopted omits several direct and indirect contributing factors in the research and data analysis. Numerous audits are costly in terms of finance and resources. Also, it creates system circumvention and habitual cheating that damages genuine improvement.

Furthermore, corporations’ primary rationale behind establishing and implementing social and labor standards compliance likely focus on economic interests alone. Thus, it is questionable to push the idea that a voluntary private system could replace the concept of a robust State Labor Regulatory regime in totality. Instead, private compliance initiatives may complement state regulatory approaches to enhance public efforts to improve working conditions. Private compliance initiatives may also fill in the gaps, at situations when sourcing countries are either have no specific labor policy or the state regulatory compliance agency could not improve supply chain compliance performance due to lack of capacity and resources

The History of Indonesia Labor Legislative Regime

Labor law has a unique characteristic compared to other types of public policy. First, labor law lies between public law and private law spheres. It governs the relationship between two parties, employers and employees, as in a contract. In parallel, the State interferes by imposing binding rules, sometimes followed by sanction, on the relationships in question. There are several fundamental arguments on the interference of the State in employment relations. Socio-politic, humanism, until economic arguments are likely suggested. However, the prominent and the most uncomplicated idea is innately imbalanced power relations between employers and employees.

Employers have better bargaining positions compare to employees. This is because compared to employees, they have greater economic power and societal supremacy in a very particular sense. They often privately regulate the market, which subsequently influences norms in the labor market. In other words, although employment relationships conception encompasses the principle of contractual freedom where two free and equal parties bind themselves into a contract, employees, in reality, have minimal say and almost non-existence bargaining power in the construction of employment relationships. State interference objective likely to balance power relations in the market so that employers could achieve their economic goals, as well as to ensure employees were able to bind themselves in a good faith contract. 

In modern Indonesia, the State labor regulations evolution may follow a different footstep compare to other countries. Indonesia went through eras of gentrification, independence, and the authoritarian political regime that shaped its labor regulatory system to what it is now.

Dutch Colonialism

There are very few pieces of literature or records showing the setting of employment and paid work before the Dutch colonialization. As Indonesia consisted of separate small kingdoms, feudalistic and vertical social structures likely control working as serving a master in return for shelter, food, and even protection. Loyalty and obedience were expected from servants, and the master entirely governs the relationships.

After decades of forced cultivation and forced labor to gain maximum profit from economic activity in the colony, the principle of liberalism that was flourished in the imperialist kingdoms found its way to the Dutch Indies in the mid-1800s. Liberal groups argue that the State, or the Dutch East Indies Company as the representative of the State, had excessively interfered in the economy. Thus, it violated individual freedom and rights to contract when conducting economic activities in the colony. Liberalism perceived employment as merely contractual relations to do economic activities. As liberalization of employment relations idea gained traction, in the late 1800s, the Dutch Indies employment contract was included in the private law sphere. The Dutch Indies Civil Codes only set an underlying agreement and paid work principle. It did not regulate employee’s rights or working conditions. Such rights were principally highly dependent on negotiation between employer and employee. The terms of the contract governed the relations of the binding parties. There was no legal or fundamental rights protection for employees as law principles only recognized employees and employers as equal parties.

Despite this, the Civil Code acknowledged collective power and collective bargaining. Bargaining Agreements, as stipulated by the Civil Code, take precedence over the individual contract. This perhaps influenced by the socio-collectivism principle that progressed in the Netherlands at the end of the 1800s. After the freedom of organization and collective was recognized as a statutory right, the number of trade unions in the Dutch Indies proliferated. However, it is worth noting that the Civil Code on employment contracts did not regulate native people or pribumi. Thus, at that time, most paid work and employment relations were foreign to the pribumi communities. Subsequently, “employed” pribumi was likely trapped in the master and slave system and had minimal rights; if it was not non-existence.

After Independence (1945-1965)

Three years after its independence from the Dutch colonialist, the Republic of Indonesia issued Labour Act No. 12 of 1948. The Act regulated young workers, female workers, working hours, and employers’ obligations for workplace protection. The regulatory objective behind the Act is clearly to step away from the liberal Civil Code. It imposed some rights and protections that in practice could not be negotiated between two unequal parties through private regulations. What is more, as the Civil Code did very little to protect native Indonesian, a protective employment regulation was established to set a precedent in a newly independent Republic.

At this very early stage, labor regulations only provided basic protections. Labour Act No. 12 of 1948 was issued to define employment relations; and the rights and responsibilities entailed, rather than simply left it to a perceived unpredicted market to regulate. The Labour Act was preceded by Workplace Accident Act No. 33 of 1947 and followed by Law No. 23 of 1948 on Labour Inspection, Law No. 21 of 1954 on Labour Agreement between Employer and Union, Law No. 18 of 1956 on Ratification of ILO Convention No. 98, Ministry of Manpower Regulation No. 90 of 1955 on Union Registration Law No. 22 of 1957 on Industrial Relations Dispute Settlement. 

The laws and regulations in question were not effective in practice as the new Republic was still politically and administratively struggling to establish its governance. Additionally, labor union’s activities were closely monitored and heavily regulated to avoid political insurgency. Despite these challenges, the first set of National Labor Regulations lay the cornerstone of the modern Indonesian Labor Regulations.

New Order Government Era (1966-1998)

After it comes as the champion in the 1965 political turmoil, the new military junta adopted authoritarian modernization. Principally, a militaristic regime often views itself as bringing political, social, and economic stability to justify the rigid control of the State in every aspect of life. For instance, the State controls the economy to pursue maximum economic growth. Naturally, in Indonesia during the military junta, labor movements were closely monitored more than before. Labor activities outside of the production of goods and services were perceived as a disturbance to the smooth rotation of industrial wheels. 

Notably, labor was viewed as a political risk to the ruling government. Organized labor movements likely generate and circulate the idea of collectivism, which was feared the most by an authoritarian state. Thus, a barren single union is created, operated, and monitored by the State. This scheme is likely formed only as a legal consequence of ratifying ILO Convention No. 98 by Law No. 18 of 1956. The Regime produced Labor Act No. 14 of 1969 instead of rightly providing a voice to the collective to equally and actively participate in industrial relations.

In the early era of the New Order Regime, State interference in labor matters is apparent. For instance, Labour Act No. 14 of 1969 stipulated that the State runs labor provision, dissemination, and arrangement. Laborers were also viewed as production tools which primary and sole role were to produce goods and service for the social welfare. Worker rights were limited to the protection of safety and health, and morals, right to be treated with dignity and provided with a workplace that maintains workforce morale. Although collective right was legally recognized during this period, history shows that this was not the case in practice. 

Unlike collective rights, the authoritarian government seemed to view Safety and Health as a safe subject matter to regulates further in a separate Act. Occupational safety and health discourse are less likely to create a rift in the workplace. Moreover, sound occupational health and safety have a direct link to worker productivity. Thus, the Safety Act No. 1 of 1970 is issued. It stipulates the employer’s responsibilities to provide a safe and healthy workplace in detail, as well as recognizing worker rights to a safe and healthy workplace.

Over time, the effect of global economic competitiveness and geopolitical shifts weaken the power of the authoritarian government. The new reform State speedily enacted Labor Act No. 25 of 1997 to replace the outdated Act No Act No. 14 of 1969. Even though industrial relations and workplace dialogue were still unrecognized by the Act in question, Labor Act No. 25 of 1997 lays the elements of universal workplace rights and protections such as employment conditions, floor wage, statutory leaves, and social insurance. Despite its drawback, Labor Act No. 25 of 1997 put a sterner foundation for advancing workplace protection and worker rights in Indonesia.

Reformation Period (1998-present)

Highly Protected Labor Market

The Economic crisis that hit Asia in 1998 become the primary trigger of the reformation movement. Rapid high-cost economy brings about the ideas of deregulation, privatization, market liberalization, and democracy. Strict authoritarian administrative was considered to affect the Country’s economic resilience and competitiveness. Thus, in order to survive the crisis, it is necessary to change the political map of the Country. All things considered. The reformation movement is altered not only the state industrial design but also social and political principles.

Of labor matters, Reformation brought new opportunities to deregulate the national labor market to increase competitiveness in the global economy. The first step taken by the Transition Administration was to ratify the ILO Convention No. 87 on Freedom of Association and Protection of the Right to Organize and ILO Convention No. 138 on Minimum Age to be Allowed to Work in 1998-1999. Ratifications of these conventions put Indonesia back on the democratic free world map as a country that respects human rights.

Ratification of Convention No.87 resurrects collectivism in the labor realm. It abolishes the single union system and, with the issuance of Union Act No. 21 of 2000, places trade unions as an important stakeholder in creating sound industrial relations and enforcing workers’ rights. Although its regulatory objective is to protect worker’s right to associate, the Union Act, however, received numerous criticisms. For instance, the stipulation of establishing a union at the company level with only ten persons not only rapidly proliferate the number of unions but also opening a possibility of saturated industrial relations. It gives, as the opponents argue, too much power on collective labor in dealing with the individual employer, which could jeopardize sound industrial relations and hamper day-to-day business processes. The concern of union polarization is also often argued by the opponent of the Act.

Of the ILO Convention No. 138 ratification, it enhances the degree of protection of underage workers by increasing the working-age from 10 years old to 15 years old. It averts exploitation of children as cheap (and docile) labor. Additionally, in the socio-community perspective, it protects school-age children to get a compulsory education and thus, in time, increase the capacity of the future workforce. It is worth noting that working-age revision to 15 years is in line with the State’s nine years- compulsory education which has been a public policy since 1994.

Ethical and community values on labor and employment relations may perhaps change in the early Reformation era: from labor as economic tools to fulfill the needs of the society to individual or collective who have specific rights as human beings and as workers. These good tidings, however, were not followed by a revision of the regulatory umbrella, Labor Act No. 25 of 1997. At least not until 2003, when the State enacted Labor Act 13 of 2003. The Act in question replaces as many as 15 labor regulations. From the day it was enacted, Labor Act No. 13 of 2003 becomes the legal umbrella for other derivative labor regulations such as government or ministry regulations.

The Act consists of 17 chapters and regulates almost every aspect of labor, except Safety and Health. Labour Act No. 13 of 2003, a regulatory product of the reformation era, could be seen as the actual bedrock of modern labor regulations. It implants universal worker’s rights (human rights) in labor policy such as the conception of decent work, anti-discrimination, protection for women at the workplace, rights to associate, and job security. The core improvement compares to the previous obsolete Acts is the principle of labor as an individual and social being. It introduces labor (first) as individuals with protected individual rights to meet their needs and life demands, and (second) as a social being that contributes to the greater objective in the Country’s economic development. Thus, it could be argued that Labour Act 13 of 2003 aim is to humanized labor to achieve a financial goal.

Despite this strong central point, the Labour Act No. 13 of 2003 is far from perfect. Some argued that the Act creates more challenges instead of answers to the ever-changing and competitive market and problematic social conditions. Type of employment contract: permanent full-time, non-permanent full time, daily/casual, outsourcing that is regulated by the Act in practice create new challenges and sometimes dispute between employee/collective of employees and employer. Employers claimed that the scheme, in reality, is not flexible enough to tackle business challenges. While employee/s or collective of employees perceived the system as a way to legally evade ethical responsibility to provide protection and ensure worker’s rights are upheld.

The revision of the definition of children from persons under the age of 15 to 18 years is also socially problematic. This is because the revision is not followed by the improvement of the policy of compulsory education. It still regulates nine years of compulsory education which means children are only required to go to school until they reached 15 years of age. As such, in some regions where access to education provided is only up to the compulsory level, the labor market likely becomes saturated with children age less than 18 years, the legal full-time working age. The proponents of this legal definition may perhaps argue that it was established to provide more protection to children in the crucial stage of mental and physical development. Additionally, there is separate regulation that imposed rigorous protection requirements that allow children between 15-17 years to work. Nonetheless, these arguments do not address the problematic social issues prone to those qualified as children by the Labour Act, such as exploitation, poverty, and other socio-economic issues.

It could also be argued that, to some degree, the protection provisions stipulated by the Act are a form of shifting public responsibility to private actors. For instance, in the case of termination of employment relations, the significant amount of severance that employers should pay likely shows the unfair distribution of social welfare responsibility between the State and private sector. Instead of creating a sustainable system of social protection in relation to (post) employment, the State requires private actors to hold social welfare burdens. This policy, in return, would negatively affect workers when employers, intentionally or unintentionally, circumvent the stipulated regulation because they did not have enough capital or were unwilling to risk part of their capital to comply with the rules.

Labour Act No. 13 of 2003 is not the only regulation that aimed to align public policy with labor socio-economy and political norms that are progressively changing after the reformation movement in 1998. The proliferation of labor collectivism likely resulted in the issuance of Act No. 2 of 2004 on Industrial Relations Dispute Settlement. It introduces resolution outside the litigation system and Industrial Relations Court in Indonesian labor policy.   

A Looking Glass into a more Flexible Labor Market 

After contentious discussion and mass protests, the President of the Republic of Indonesia signed the Omnibus Bill into Law on 2 November 2020. The 1,187-page Act – 769 pages on Articles of Law and 418 pages of Explanation, is registered in the State Gazette as Law No. 11 of 2020 concerning Job Creation. On the employment subject matter, Chapter IV concerning Labour did not repeal Labour Act No. 13 of 2003 but instead change, remove or stipulate new provisions, as stated in Article 80 (a) Part One Chapter IV of the Omnibus Law. This means that those provisions of Labour Act 13 of 2002 that were not amended, removed, or reset (and its derivative regulations) are still applicable as long as they are not in conflict with provisions stipulated in the Omnibus Law.

Chapter IV of the Job Creation Act is perceived by many of the opponents as the Government’s effort to liberalize the labor market even more by reducing the perceived excessive labor protections stipulated by the Labour Act No. 13 of 2003 and its derivate regulations. Over-protection clauses and the implied meanings of the creation, such as the excessive amount of severance payment and social insurance that somewhat divert the State responsibility to the private sector, have made Indonesia less attractive for foreign investors than other South East Asia producer countries.


Labor regulatory objective during the period after the Indonesian independence was to move away from the imperialist legal system that disadvantaging labor. The State, at this period, interfered with the market to set new labor standards and strike a balance between corporate/employer power and labor power. However, as the new country was constantly changing in search of its sovereign form, labor matters become less important. At some point, labor collectivism was viewed as a hazard to the harmonious socio-political life that the State eagerly pursued.

The fundamental change in the labor sphere in the new order regime era was greater State interference in the market. It is solely directed by the State’s main agenda to achieve maximum economic gain and political amity. The State was standing on the side of those who have capital as a regulatory objective heavily influenced by financial interests. Labour was viewed as merely a production instrument, as it is often viewed in the liberal market. Also, collectivism was perceived as a risk to the economy and socio-political harmony; thus, the State minimizes the power of labor. Consequently, power relations between employers and employees were very much imbalanced, which in time create adversarial industrial relations at the workplace. Unlike the previous era, the State labor policy in the reformation era was to adopt the universal values of human rights and worker protections. The central concept of the Act was providing decent work while balancing power relations between employer/s and employee/s. However, some aspects of the Act by design likely increased friction of interest between employer and employee, such as in the matter of the type of employment contract.

Ethical and community values on labor and employment relations which have been continuously transforming since the early reformation era in 1997-1998, shows that a major shift in the perspective from labor as economic tools to fulfill business needs to workers with specific rights would not easily be reversed by a regulatory relief. At the same time, ever-shifting pandemic-influenced perspectives of labor stakeholders on the flexible labor market and flexible employment shall be taken into account to ensure Indonesia continues to be a competitive market that respects labor and human rights principles. The Job Creation Act might be perceived as the regulatory relief to a very complex dynamic by both the State and the industry. Its agility, however, has yet to be seen and tested by time.